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The euro was not just the outcome of an idiosyncratic quest to reduce the wear on pockets stuffed with odd national coins, or to facilitate intra-European trade. The bold European experiment reflected a new attitude about what money should do, as well as how it should be managed. In opting for a “pure” form of money, created by a central bank independent of national authority, Europeans self-consciously flew in the face of what had become the dominant monetary tradition.
In the twentieth century, the creation of money – paper money – was usually thought to be the domain of the state. Money could be issued because governments had the power to define the unit of account in which taxes should be paid. This tradition went back well before paper, or fiat, currencies. For many centuries, even while metallic money circulated, the task of defining units of account – livres tournois, marks, gulden, florins, or dollars – remained a task of the state (or of those with political power).
Abuse of this role, with governments addressing excessive debt by inflating it away, was deeply destructive of political order in the first half of the twentieth century. But monetary abuse is no less dangerous in political systems with multi-layered authority, and in the past often led to the breakup of federal states.
The makers of modern Europe saw that unstable and politically-abused money would be a European nightmare, and lead to destructive national animosities and antagonisms. They were supported by the twentieth century’s two most influential economists, Friedrich von Hayek and John Maynard Keynes. The Hayekian element of a money-issuing authority that was extensively protected against political pressures, and consequently against political opprobrium, was a key part of the European Union’s Maastricht Treaty. Keynes, too, in planning for the postwar order, proposed a synthetic global currency that would guarantee stability and prevent deflation.
The vision of central-bank independence as a necessary part of the constitution of a sound and stable political order was not simply a European construct in the 1990’s. It was also reflected in legislative changes affecting other central banks, and in central bankers’ growing prestige. That view is now seriously challenged. In the aftermath of the worst financial crisis since WWII, central banks are once again being called on to monetise securities issued by some debtors, but not others. That task of selecting between debtors is highly political, and poisons the idea of monetary stability.
Jean-Claude Trichet, until recently the president of the European Central Bank, liked to claim that money was like poetry, before adding that both give a sense of stability. Stable money, too, is the foundation of political order. We should not allow ourselves to be so overwhelmed by today’s crisis that we forget that.